If you participate in a 401(k) qualified retirement plan at work you may be aware of a feature that lets you borrow up to 50% of the account's value, or $50,000, whichever is smaller. These loans usually have interest rates a point or two above prime, which is much lower than the rates typically charged by credit card companies. Since you are the lender, you are basically paying yourself back. That's right - every dime in interest paid on a 401(k) loan goes directly into the borrower's 401(k) account. 401(k) accounts are legally protected from your creditors and bankruptcy in the event of extreme financial difficulty.
As with any repayment method, there are drawbacks. Uncle Sam will double dip in your retirement funds. You will most likely repay the loan with after-tax funds, and the interest will be taxed again when you withdraw money from the 401(k). You must repay the loan within five years. This could be challenging depending on the job environment and the constantly increasing costs of everyday life. If you leave your employment prior to full repayment, the outstanding balance becomes due and payable immediately. If the loan is not repaid, the balance will be treated as a distribution and you'll be required to pay tax on the distribution amount. Furthermore, if you are under the age of 59 and one-half, you will be assessed an additional 10% excise tax as a penalty for early withdrawal of retirement funds.
Be sure to contact us to discuss all of the options available to you before making a decision.